My VPS hosting provider has agreed that I can use their DNS servers to present a more professional look by giving out vanity nameservers to my clients.
For example, they have said I need a DNS records directing ns1.MyDomain.com to the IP of ns1.VPSProvider.com.
Therefore any DNS queries sent to ns1.MyDomain.com will then be sent to the IP for ns1.VPSProvider.com instead and they will respond
The domain is registered with 123-reg. Therefore, how/where do I add a dns record for ns1.MyDomain.com would it be with 123-reg's help? Is it just a CNAME record of ns1?
Secondly, are their any disadvantages by having a vanity nameserver like this e.g. spam, google, rdns etc
You cannot use CNAME records since the right-hand side of a NS record cannot be an alias (RFC 1035, section 3.6.2).You have to use A and AAAA records and keep them in synch with VPSProvider.com. Not easy because they can change suddenly.
Frankly, if you do not know the DNS at all, it is better to not use "vanity name servers", specially for paying customers...
You need to create two A records pointing ns1.mydomain.com to the ip address of ns1.vpsprovider.com, and ns2.mydomain.com to the ip address of ns2.vpsprovider.com. CNAME entries add extra dns lookups, and should be avoided when creating nameservers (and infact break RFCs).
If you're using these vanity nameservers for your own domain and not just for other people's domains, then you'll also need to set the ns records for your domain to your own nameservers and the ip addresses of the nameservers provided. You'll want to do all this on your vps provider's nameservers rather than 123-reg's because you'll no longer be using 123-reg for anything other than domain registration.
There are no disadvantages in having a nameserver setup like this other than the fact that you then have to use the control panel of the vps provider to change your dns rather than the 123-reg control panel (though that may actually be an advantage).
I don't recall if 123-reg provide .uk nameservers or not. If they do, and your domain is a .uk domain, then there will be a small theoretical loss of speed by switching to a .com nameserver. However this won't be noticable.